Wells Fargo’s next offering of commercial mortgage bonds relies on exposure to a newly-constructed 58-story office/condominium tower in San Francisco to reduce overall leverage in the $766.7 million pool of collateral.
Wells Fargo Commercial Mortgage Trust 2018-C44 is backed by a total of 44 loans secured by 55 properties, according to Fitch Ratings. The seventh-largest loan (3.9% of the pool), which is secured by 181 Fremont Street in San Francisco’s central business district, received an investment-grade credit opinion of BBB on a stand-alone basis. The collateral for the loan is the 436,332 square feet of office space on the first 38 floors (and not the 67 residential condos at the top of the building). The office space is 100% leased to Facebook.
The building’s owner obtained a $250 million first mortgage and $225 million of mezzanine debt which, along with $695,692 of equity, were used to refinance construction debt of approximately $351.2 million, fund rent reserves, fund landlord leasing cost obligations and pay closing costs.
Only a $30 million portion of the mortgage is being contributed to the Wells Fargo securitization. So CMBS investors can expect to see the remainder show up in other deals.
In total, the portion of the collateral pool for the Wells Fargo deal with investment-grade credit opinions is 11.7%.
Even so, the pool’s leverage is “substantially higher” than that of recent Fitch-rated multiborrower transactions. It has a debt service coverage ratio, as measured by the rating agency, of 1.09x. That’s well below the 2017 average of 1.26x. And the loan-to-value ratio, as measured by Fitch, is 111.3%, above the 2017 average of 101.6%.
Excluding the credit opinion loans, the Fitch DSCR is even lower, at 1.08x and the Fitch LTV is higher, at 113%, compared with the 2017 averages of 1.21x and 107.2%, respectively.
Among other ratings considerations, Fitch noted that loans secured by hotel properties represent only 12.8% of the pool by balance, which is lower than the 2017 average of 15.8% for Fitch-rated transactions. That’s a positive, since hotels have the highest probability of default in Fitch‘s multiborrower model, all else equal.
Loans secured by office properties and mixed-use properties that are predominantly office make up 39.9% of the pool. Loans secured by retail properties and mixed-use properties that are predominantly retail make up 24.7% of the pool. Office and retail properties have an average probability of default in Fitch‘s multiborrower model, all else equal.
In addition to Wells Fargo, the loans used as collateral were contributed to the securitization trust by Barclays Bank, Ladder Capital Finance and Argentic Real Estate Finance.
Rialto Real Estate Finance III-D AIV RR H, a third-party purchaser, will purchase and retain on an ongoing basis an “eligible horizontal residual interest” in order to comply with skin-in-the-game rules.
Fitch expects to assign an AAA rating to the super-senior tranches of notes to be issued, which benefit from 30% credit enhancement, as well as to the senior tranche of notes with
24.375% credit enhancement.